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Rushing to spend like Britain could leave us out in the cold

Published in Canberra Times, 16 February 2009 (PDF)

When I first came to Australia I was greeted by a friendly immigration officer at Sydney airport. Looking at my passport he wanted to know whether I had ever visited Australia before. After I stated that I hadn’t he asked whether I had been to England, which I happily confirmed. The officer smiled: ”It’s just like England, only warmer”, and handed me back my passport. Somewhat puzzled I left Kingsford Smith airport and went to on to see what he meant.

Today, 10 years after this strange introduction to Australia, I am still not sure whether the officer was serious or whether he just liked teasing German tourists. But having since lived in both London and Sydney for several years, I feel at least more confident to draw my own comparisons now.

When it comes to comparing countries, you are well advised to be careful, though. Things may look superficially similar, but only misleadingly so. As they say, Ginger Rogers did everything Fred Astaire did, but she did it backwards, in high heels. There are obvious parallels between Australia and Britain. Both countries underwent painful, yet ultimately successful economic reforms in the 1980s. The first difference is that it was the Conservative Party implementing them in Britain, whereas Australia’s economic modernisation was done by the social democratic ALP. Economic liberalism or ”neo-liberalism” may not be the most popular set of ideas today, but whoever wants to deny the success of Australian and British free-market reforms should just think back to the 1970s. The Australian economy had fallen down the international league tables, and Britain even had to turn to the International Monetary Fund IMF for a bailout. Both countries were at the crossroads, and both managed to reinvent themselves as outward-looking, fast-moving economies.

The point of departure between Australia’s and Britain’s fortunes came in the late 1990s. In a strange twist of history it was the result of yet another parallel when the original pro-reform parties lost power to the Opposition. The new governments under John Howard and Tony Blair did not do much to alter their countries’ economic course and basically continued with their predecessor’s policies. At least this is the commonly believed story. There is only one problem with it: It is not true, at least not in the case of Britain.

When Tony Blair’s relabelled ”New” Labour party won the 1997 election, he seemed to be a safe pair of hands on the economy. Labour before Blair was seen as dangerously naive on economic matters at best and completely out of touch with the economy at worst. Former Labour leader Michael Foot went into the 1983 general election with a radical left-wing manifesto known as ”the longest suicide note in history”. Before the 1992 election The Sun newspaper famously warned about a victory of then Labour leader Neil Kinnock, ”If Kinnock wins today will the last person to leave Britain please turn out the lights”.

The conclusion that Blair had drawn from his party’s previous defeats was unambiguous. If Labour wanted to stand any chance of being elected, they had to portray themselves as economic conservatives. And so they did: Before the 1997 election New Labour promised to honour the Conservative Party’s spending plans for four years while ruling out any income tax rises.

Labour’s transformation into an economically conservative party was as shallow as it was short-lived. While fiscal discipline indeed lasted for the first few years in government, the party soon reverted to more traditional Labour policies. In particular, public spending on health and education dramatically increased. Unfortunately for Britain, the surge in funding mainly helped to feed large and growing bureaucracies. During a decade of New Labour an extra 1.2 trillion (A$2.63 trillion) was spent, financed partly by covert tax hikes but also by running large budget deficits, even when the economy was still growing. Labour’s fiscal profligacy left Britain ill-prepared for the present economic crisis. In parts of the country the state now accounts for between two thirds and three quarters of economic activity. To speak of the United Kingdom of Great Britain and Northern Ireland completely misses the point. United Soviet Republics would be a far better description, although parts of Eastern Europe in the Cold War probably had a larger private sector than Britain today.

Where there should be a budget in the British Treasury, there is only a black hole. The pound sterling has slumped against both the Euro and the US dollar, and it no longer seems impossible to imagine a re-run of Britain’s 1970s experience, including once again turning to the IMF for a cash injection. Britain could soon follow Iceland’s example and declare bankruptcy. Commentators are already speaking of ”Reykjavik-on-Thames”.

Australians can count themselves lucky that while Tony Blair and his Chancellor and eventual successor Gordon Brown did their best to cripple the British economy, their mistakes were not repeated in Australia. While public sector spending also increased under the Coalition government here, it was nevertheless kept in check by their insistence on budget surpluses.

Yet in another episode of history repeating, the Australian Labor Party like Blair’s New Labour made themselves electable by posing as economic conservatives. During the 2007 election it was a badge that Kevin Rudd wore with pride. If you had followed British politics for the past decade, all this must have sounded awfully familiar. And what was all this talk of ”New Leadership?” Wasn’t it precisely the kind of ”New Labour” repositioning, which happened under Tony Blair? Where New Labour once promised to honour Conservative spending plans, Prime Minister Kevin Rudd and Treasurer Wayne Swan assured the electorate they would keep the budget in surplus.

Having just moved to Australia from Blair’s and Brown’s Britain, it is fascinating to watch Rudd following in their footsteps. The only thing that’s different is the speed at which Rudd managed to give up his carefully constructed image as an economic conservative to return to the traditional social democratic terrain of tax, borrow and spend.

The economic crisis may have accelerated Rudd’s transition from prudence to profligacy, and it may well be that his predecessors would have done something similar if still in office. But it still feels like an antipodean remake of the Blair years. Is this really the road that Australia wants to take, I cannot help but wonder. In hindsight, the Blair and Brown approach to economic policy was always close to charlatanry. It rested on the illusion that they could spend as if there was no tomorrow. But tomorrow came sooner than they knew it. Blair’s ”Third Way” was built around the hubristic belief that government could steer the economy. Gordon Brown even went so far that he declared ”the end of boom and bust”. But now it looks as if the bust will soon mark the end of Gordon Brown’s ill-fated premiership.

So is Australia really just a warmer version of England, as the immigration officer suggested to me 10 years ago?

Probably not yet, if simply for the fact that in the past decade Australia has avoided the worst mistakes made in Britain. But if Rudd continues his New Labour-like policies, Australia may well become another Britain, if only without the snow.

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